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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One)
 x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to Commission file number 000-31511 @ROAD, INC.
(Exact name of registrant as specified in its charter) Delaware
    
    94-3209170(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 47200 Bayside Parkway
Fremont, CA 94538
(Address of principal executive offices, including zip code) 510-668-1638
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes     x     No     o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes     x     No     o As of July 30, 2004 there were 54,514,222 shares of the registrants Common
Stock outstanding. 1




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INDEX PART I.
    
    FINANCIAL INFORMATIONItem 1. Financial Statements.Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003.Condensed
Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003.Condensed
Consolidated Statements of Stockholders' Equity for the six months
ended June 30, 2004, December 31, 2003 and June 30, 2003.Condensed
Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003.Notes to Condensed Consolidated Financial Statements.Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.Item 3. Quantitative and Qualitative Disclosures About Market Risk.Item 4. Controls and Procedures.PART II.
    
    OTHER INFORMATIONItem 1. Legal Proceedings.Item 4. Submission of Matters to a Vote of Security Holders.Item 6. Exhibits and Reports on Form 8-K.EXHIBIT 10.42EXHIBIT 10.43EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
 2




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements. 
 @Road, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share and par value amounts)
(unaudited) June 30,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    14,864
    
    
    $
    103,669Short-term investments
    
    
    96,784
    
    
    
    2,000Accounts receivable, net
    
    
    5,813
    
    
    
    7,109Inventories
    
    
    3,248
    
    
    
    2,425Deferred product costs
    
    
    12,735
    
    
    
    11,921Prepaid expenses and other
    
    
    1,047
    
    
    
    1,269Total current assets
    
    
    134,491
    
    
    
    128,393Property and equipment, net
    
    
    2,406
    
    
    
    2,298Deferred product costs
    
    
    6,693
    
    
    
    7,270Intangible assets, net
    
    
    6
    
    
    
    28Other assets
    
    
    334
    
    
    
    1,027Total assets
    
    $
    143,930
    
    
    $
    139,016LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,493
    
    
    $
    5,057Accrued liabilities
    
    
    5,559
    
    
    
    5,465Deferred revenue and customer deposits
    
    
    10,696
    
    
    
    9,751Total current liabilities
    
    
    19,748
    
    
    
    20,273Deferred revenue
    
    
    5,669
    
    
    
    6,582Other long-term liabilities
    
    
    12
    
    
    
    33Total liabilities
    
    
    25,429
    
    
    
    26,888Stockholders equity:Preferred stock, $0.0001 par value,
10,000,000 shares authorized, shares
issued and outstanding: none at June 30,
2004 and December 31, 2003
    
    
    
    
    
    
    Common stock, $0.0001 par value,
250,000,000 shares authorized, shares
issued and outstanding: 54,416,483 at June
30, 2004, 53,700,445 at December 31, 2003
    
    
    230,772
    
    
    
    228,441Deferred stock compensation
    
    
    
    
    
    
    (4
    )Notes receivable from stockholders
    
    
    (37
    )
    
    
    (87
    )Accumulated other comprehensive loss
    
    
    (188
    )
    
    
    Accumulated deficit
    
    
    (112,046
    )
    
    
    (116,222
    )Total stockholders equity
    
    
    118,501
    
    
    
    112,128Total liabilities and stockholders equity
    
    $
    143,930
    
    
    $
    139,016
 See notes to condensed consolidated financial statements. 3




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@Road, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(unaudited) Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues:Service
    
    $
    14,385
    
    
    $
    12,135
    
    
    $
    28,412
    
    
    $
    22,738Product
    
    
    3,946
    
    
    
    3,634
    
    
    
    7,811
    
    
    
    6,772Total revenues
    
    
    18,331
    
    
    
    15,769
    
    
    
    36,223
    
    
    
    29,510Costs and expenses:Cost of service revenue (excluding intangibles amortization included below)
    
    
    4,278
    
    
    
    4,266
    
    
    
    8,241
    
    
    
    8,058Cost of product revenue
    
    
    4,391
    
    
    
    5,192
    
    
    
    8,796
    
    
    
    9,829Intangibles amortization
    
    
    11
    
    
    
    10
    
    
    
    21
    
    
    
    434Sales and marketing
    
    
    3,082
    
    
    
    2,840
    
    
    
    6,193
    
    
    
    5,437Research and development
    
    
    1,431
    
    
    
    1,297
    
    
    
    2,798
    
    
    
    2,633General and administrative
    
    
    2,371
    
    
    
    2,440
    
    
    
    4,553
    
    
    
    4,658Terminated
acquisition costs (Note 9)
    
    
    2,017
    
    
    
    
    
    
    
    2,017
    
    
    
    Stock compensation(*)
    
    
    
    
    
    
    95
    
    
    
    4
    
    
    
    287Total costs and expenses
    
    
    17,581
    
    
    
    16,140
    
    
    
    32,623
    
    
    
    31,336Income (loss) from operations
    
    
    750
    
    
    
    (371
    )
    
    
    3,600
    
    
    
    (1,826
    )Other income
(expense), net:Interest
income, net
    
    
    329
    
    
    
    137
    
    
    
    583
    
    
    
    285Other income
(expense), net
    
    
    (13
    )
    
    
    7
    
    
    
    (7
    )
    
    
    11Total other
income (expense), net
    
    
    316
    
    
    
    144
    
    
    
    576
    
    
    
    296Net income (loss)
    
    $
    1,066
    
    
    $
    (277
    )
    
    $
    4,176
    
    
    $
    (1,530
    )Net income (loss) per share:Basic
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.08
    
    
    $
    (0.03
    )Diluted
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.07
    
    
    $
    (0.03
    )Shares used in calculating net income (loss) per share:Basic
    
    
    54,185
    
    
    
    48,196
    
    
    
    53,978
    
    
    
    47,887Diluted
    
    
    57,414
    
    
    
    48,196
    
    
    
    57,856
    
    
    
    47,887(*)Stock compensation:Cost of service revenue
    
    $
    
    
    
    $
    2
    
    
    $
    
    
    
    $
    7Cost of product revenue
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    14Sales and marketing
    
    
    
    
    
    
    5
    
    
    
    1
    
    
    
    10Research and development
    
    
    
    
    
    
    15
    
    
    
    1
    
    
    
    50General and administrative
    
    
    
    
    
    
    69
    
    
    
    2
    
    
    
    206Total
    
    $
    
    
    
    $
    95
    
    
    $
    4
    
    
    $
    287
 See notes to condensed consolidated financial statements. 4




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@Road, Inc.
Condensed Consolidated Statements of Stockholders Equity and
Comprehensive Income
For the Six Months Ended June 30, 2004 and 2003
and the Six Months Ended December 31,
2003

(In thousands, except share amounts)
(unaudited) Notes
    
    AccumulatedDeferred
    
    Receivable
    
    Other
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    Stock
    
    From
    
    Comprehensive
    
    Accumulated
    
    Stockholders
    
    ComprehensiveShares
    
    Amount
    
    Compensation
    
    Stockholders
    
    Loss
    
    Deficit
    
    Equity
    
    Income (Loss)BALANCES, January 1, 2003
    
    
    47,747,156
    
    
    $
    170,610
    
    
    $
    (491
    )
    
    $
    (2,068
    )
    
    $
    
    
    
    $
    (117,884
    )
    
    $
    50,167Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,530
    )
    
    
    (1,530
    )
    
    $
    (1,530
    )Shares
issued under employee stock purchase plan
    
    
    287,545
    
    
    
    595
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    595Exercise of stock options
    
    
    638,438
    
    
    
    1,351
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,351Collection of notes receivable from stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    543
    
    
    
    
    
    
    
    
    
    
    
    543Deferred stock compensation
    
    
    
    
    
    
    5
    
    
    
    (5
    )Reversal of deferred stock compensation due to
employee terminations
    
    
    
    
    
    
    (25
    )
    
    
    25Amortization of deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    287
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    287BALANCES,
June 30, 2003
    
    
    48,673,139
    
    
    $
    172,536
    
    
    $
    (184
    )
    
    $
    (1,525
    )
    
    $
    
    
    
    $
    (119,414
    )
    
    $
    51,413Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,192
    
    
    
    3,192
    
    
    $
    3,192Common stock issued through secondary public
offering, net of issuance costs
    
    
    4,000,000
    
    
    
    51,889
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,889Shares
issued under employee stock purchase plan
    
    
    275,750
    
    
    
    889
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    889Exercise of stock options
    
    
    751,556
    
    
    
    3,127
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,127Collection of notes receivable from stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,438
    
    
    
    
    
    
    
    
    
    
    
    1,438Amortization of deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    180
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    180BALANCES, December 31, 2003
    
    
    53,700,445
    
    
    $
    228,441
    
    
    $
    (4
    )
    
    $
    (87
    )
    
    $
    
    
    
    $
    (116,222
    )
    
    $
    112,128Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,176
    
    
    $
    4,176
    
    
    $
    4,176Unrealized
gain (loss) loss on short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (188
    )
    
    
    
    
    
    
    (188
    )
    
    
    (188
    )Comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,988Shares
issued under employee stock purchase plan
    
    
    242,585
    
    
    
    1,129
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,129Exercise of stock options
    
    
    473,453
    
    
    
    1,202
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,202Collection of notes receivable from stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    50Amortization of deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4BALANCES,
June 30, 2004
    
    
    54,416,483
    
    
    $
    230,772
    
    
    $
    
    
    
    $
    (37
    )
    
    $
    (188
    )
    
    $
    (112,046
    )
    
    $
    118,501
 See notes to condensed consolidated financial statements. 5




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@Road, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited) Six Months EndedJune 30,2004
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    4,176
    
    
    $
    (1,530
    )Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization
    
    
    617
    
    
    
    1,511Loss on disposal of property and equipment
    
    
    
    
    
    
    4Amortization of deferred stock compensation
    
    
    4
    
    
    
    287Provision for inventory reserves
    
    
    (48
    )
    
    
    536Provision for doubtful accounts and sales returns
    
    
    (413
    )
    
    
    60Change in assets and liabilities:Accounts receivable
    
    
    1,709
    
    
    
    (210
    )Inventories
    
    
    (775
    )
    
    
    269Deferred product costs
    
    
    (237
    )
    
    
    (2,758
    )Prepaid expenses and other
    
    
    (1,100
    )
    
    
    250Accounts payable
    
    
    (1,564
    )
    
    
    (523
    )Accrued and other liabilities
    
    
    72
    
    
    
    (109
    )Deferred revenue and customer deposits
    
    
    32
    
    
    
    3,471Net cash provided by operating activities
    
    
    2,473
    
    
    
    1,258Cash flows from investing activities:Purchase of property and equipment
    
    
    (704
    )
    
    
    (746
    )Terminated
acquisition costs
    
    
    2,017
    
    
    
    Purchases of short-term investments
    
    
    (94,972
    )
    
    
    Proceeds from the sale of restricted short-term investments
    
    
    
    
    
    
    241Net cash used in investing activities
    
    
    (93,659
    )
    
    
    (505
    )Cash flows from financing activities:Proceeds from sale of common stock
    
    
    2,331
    
    
    
    1,946Proceeds from payments on notes receivable issued to stockholders
    
    
    50
    
    
    
    543Net cash provided by financing activities
    
    
    2,381
    
    
    
    2,489Net increase (decrease) in cash and cash equivalents
    
    
    (88,805
    )
    
    
    3,242Cash and cash equivalents:Beginning of period
    
    
    103,669
    
    
    
    35,659End of period
    
    $
    14,864
    
    
    $
    38,901Non-cash investing and financing activities:Deferred stock compensation
    
    $
    
    
    
    $
    5Reversal of deferred stock compensation
    
    $
    
    
    
    $
    25Unrealized
loss on short-term investments
    
    $
    188
    
    
    $
 See notes to condensed consolidated financial statements. 6




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@Road, Inc.
Notes To Condensed Consolidated Financial Statements
(unaudited) Note 1  Basis of Presentation and Summary of Significant Accounting Policies The accompanying condensed consolidated financial statements were prepared
by At Road, Inc., without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes the disclosures which are made are adequate to make the
information presented not misleading. In the opinion of management, the
financial statements include all adjustments (consisting only of normal
recurring adjustments) necessary to fairly present the financial condition,
results of operations, and cash flows for the periods presented. Results of operations
for the periods presented are not necessarily indicative of results to be
expected for any other interim period or for the full year. These condensed
consolidated financial statements should be read in conjunction with the
Companys consolidated financial statements and notes thereto in its Form 10-K
for the year ended December 31, 2003 (No. 000-31511), filed with the SEC. Motorola is the sole supplier of microcontrollers used in the Companys
products. The Company expects to rely on Motorola as a source for this
component for the next several years. Taiwan Semiconductor Manufacturing
Company (TSMC) is the sole manufacturer of the Companys Global Positioning
System digital receiver chips used in some of the Companys products. The
Company expects to rely on TSMC as a source for this component for at least the
next twelve months. Note 2  Basic and Diluted Net Income (Loss) per Share Basic net income (loss) per share excludes the effect of dilutive
securities and is computed by dividing net income (loss) by the weighted
average common shares outstanding (excluding shares subject to repurchase).
Diluted net income per share is computed by dividing net income by the weighted
average common shares outstanding plus the weighted average number of common
shares resulting from the assumed conversion of outstanding stock options and
employee stock plan shares using the treasury stock method. Common share equivalents are excluded from the
computation in loss periods, as their effect would be antidilutive. The following is a reconciliation of the denominators used in calculating
basic and diluted net income (loss) per share (in thousands, except per share
data): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    1,066
    
    
    $
    (227
    )
    
    $
    4,176
    
    
    $
    (1,530
    )Shares (denominator):BasicWeighted average common shares outstanding
    
    
    54,185
    
    
    
    48,373
    
    
    
    53,990
    
    
    
    48,125Weighted average common shares outstanding subject to repurchase
    
    
    
    
    
    
    (177
    )
    
    
    (12
    )
    
    
    (238
    )Shares used in computation of basic net income (loss) per share
    
    
    54,185
    
    
    
    48,196
    
    
    
    53,978
    
    
    
    47,887DilutedDilution impact from option equivalent shares
    
    
    3,110
    
    
    
    N/A
    
    
    
    3,713
    
    
    
    N/ADilution impact from employee stock purchase plan
    
    
    119
    
    
    
    N/A
    
    
    
    153
    
    
    
    N/AAdd back weighted average common shares subject to repurchase
    
    
    
    
    
    
    N/A
    
    
    
    12
    
    
    
    N/AShares used in computation of diluted net income (loss) per share
    
    
    57,414
    
    
    
    48,196
    
    
    
    57,856
    
    
    
    47,887Basic net income (loss) per share
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.08
    
    
    $
    (0.03
    )Diluted net income (loss) per share
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.07
    
    
    $
    (0.03
    )
 The total number of options and restricted stock subject to repurchase
excluded from the diluted net loss per share computations were as follows (in
thousands): 7




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Three and Six Months EndedJune 30,2004
    
    2003Shares of common stock subject to repurchase
    
    
    
    
    
    
    131Outstanding options
    
    
    3,586
    
    
    
    7,638
 Note 3  Balance Sheet Items Inventories consist of raw materials, work in process and finished goods,
and are stated at the lower of cost (average cost) or market and consist of the
following (in thousands): June 30,
    
    December 31,2004
    
    2003Raw materials
    
    $
    1,178
    
    
    $
    1,294Work in process
    
    
    468
    
    
    
    177Finished goods
    
    
    1,602
    
    
    
    954Total
    
    $
    3,248
    
    
    $
    2,425
 Deferred revenue and customer deposits (excluding long-term deferred
revenue) consist of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Deferred revenue
    
    $
    10,278
    
    
    $
    9,341Customer deposits
    
    
    418
    
    
    
    410Total
    
    $
    10,696
    
    
    $
    9,751
 Note 4  Stock-Based Awards The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees, and its related
interpretations. Accordingly, no compensation expense has been recognized in
the financial statements for employee stock arrangements granted at fair market
value. The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, and Emerging Issues
Task Force (EITF) Issue No. 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, which requires that the fair value of such instruments be
recognized as an expense over the period in which the related services are
received. SFAS No. 123 requires the disclosure of pro forma net income or loss as if
the Company had adopted the fair value method. Under SFAS No. 123, the fair
value of stock-based awards to employees is calculated through the use of the Black-Scholes
option pricing model, even though the model was developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Companys stock option
awards. This model also requires subjective assumptions, including expected
time to exercise and volatility, which greatly affect the calculated values. The Companys
calculations are based on a single option valuation approach, and forfeitures
are recognized as they occur. The Company used the following weighted average
assumptions: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Stock Option Plans:Risk free interest rate
    
    
    3.85
    %
    
    
    2.74
    %
    
    
    3.32
    %
    
    
    2.76
    %Expected volatility
    
    
    104.1
    %
    
    
    115.0
    %
    
    
    105.0
    %
    
    
    117.0
    %Expected life (in years)
    
    
    5
    
    
    
    5
    
    
    
    5
    
    
    
    5Expected dividend
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
 8




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Employee Stock Purchase Plan:Risk free interest rate
    
    
    1.07
    %
    
    
    1.17
    %
    
    
    1.04
    %
    
    
    1.22
    %Expected volatility
    
    
    66.2
    %
    
    
    74.4
    %
    
    
    69.0
    %
    
    
    87.2
    %Expected life (in years)
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5Expected dividend
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
 If the computed fair values of the Companys stock-based awards to
employees had been amortized to expense over the vesting period of the awards
as specified under SFAS No. 123, net income (loss) and basic and diluted net
income (loss) per share on a pro forma basis (as compared to such items as
reported) would have been (in thousands, except per share amounts): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income (loss) as reported
    
    $
    1,066
    
    
    $
    (227
    )
    
    $
    4,176
    
    
    $
    (1,530
    )Less:
stock-based employee compensation expense included in reported net
income (loss)
    
    
    
    
    
    
    95
    
    
    
    4
    
    
    
    281Add: stock-based employee compensation expense determined under fair value based method
    
    
    (1,644
    )
    
    
    (2,512
    )
    
    
    (3,987
    )
    
    
    (4,304
    )Pro forma net income (loss)
    
    $
    (578
    )
    
    $
    2,644
    
    
    $
    193
    
    
    $
    (5,553
    )Basic net income (loss) per share:As reported
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.08
    
    
    $
    (0.03
    )Pro forma
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    0.00
    
    
    $
    (0.12
    )Diluted net income (loss) per share:As reported
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.07
    
    
    $
    (0.03
    )Pro forma
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    0.00
    
    
    $
    (0.12
    )
 Notes 5  Intangible Assets On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets. As the Company does not have any goodwill, only specifically
identifiable intangible assets are assessed. In October 2002, the Company completed the acquisition of an additional
$83,000 of purchased technology. This intangible asset is being amortized on a
straight-line basis over an estimated useful life of two years. Information regarding the Companys intangible asset is as follows (in
thousands): At June 30, 2004
    
    At December 31, 2003Carrying
    
    Accumulated
    
    
    
    
    
    Carrying
    
    AccumulatedAmount
    
    Depreciation
    
    Net
    
    Amount
    
    Depreciation
    
    NetPurchased technology
    
    $
    5,052
    
    
    $
    (5,046
    )
    
    $
    6
    
    
    $
    5,052
    
    
    $
    (5,024
    )
    
    $
    28
 For
the six months ended June 30, 2004 and 2003, amortization of
purchased technology was $21,000 and $434,000, respectively. Purchased
technology is expected to be fully amortized in 2004. Note 6  Segment Reporting During
the three and six months ended June 30, 2004 and 2003, the Company operated
in a single reportable segment. The Company plans to evaluate additional
segment disclosure requirements as it expands its operations. The Company had
no significant revenues from customers outside of the United States for the
three and six months ended June 30, 2004 and 2003 and had no significant long-lived
assets deployed outside the United States at June 30, 2004. 9




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Note 7  Recently Issued Accounting Pronouncements The Financial Accounting Standards Board (FASB) issued Interpretation 46
(FIN 46), Consolidation of Variable Interest Entities in January 2003, and a
revised interpretation of FIN 46 (FIN 46-R). FIN 46 requires certain variable
interest entities (VIEs) to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. The provisions of FIN 46 are effective immediately for all
arrangements entered into after January 31, 2003. The Company has not invested
in any entities that the Company believes are variable interest entities for
which the Company is the primary beneficiary. The adoption of FIN 46-R had no
impact on its financial position, results of operations or cash flows. In March 2004, the EITF reached a final consensus on Issue 03-01,
The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments, to provide additional guidance in determining whether investment securities have an impairment which
should be considered other-than-temporary. Management expects that
the adoption of this Issue will not have an effect on the
Companys operating results or financial condition. Note 8  Contingencies In the third quarter of 2002, AT&T Wireless announced that it expects to
cease operating its Cellular Digital Packet Data network by June 30, 2004. On
March 11, 2004, the Company received a letter dated March 9, 2004 from AT&T
Wireless that states that AT&T Wireless will continue to operate its Cellular
Digital Packet Data network for certain valuable partners, including @Road,
until at least September 30, 2004. The letter further states that this
extension of Cellular Digital Packet Data network availability extends across
all AT&T Wireless geographic locations. The Company later
received notification dated May 28, 2004 that further extended
availability of its Cellular Digital Packet Data network to
June 30, 2005. The Company is currently in discussions
with AT&T Wireless and other wireless carriers to minimize any disruption of
the provision of its services to subscribers. On or about the actual
termination date of AT&T Wireless Cellular Digital Packet Data network and
where possible, certain affected subscribers would be transferred to alternate
Cellular Digital Packet Data networks without a change to the hardware platform
then used by those subscribers. However, the Company currently estimates that
as of June 30, 2005 the Company will have approximately 2,500 subscribers
in their initial contract periods that are then using AT&T Wireless Cellular
Digital Packet Data network and that would need to use an alternate wireless
protocol to continue to use the Companys services. To use an alternate
wireless protocol, existing hardware platforms would have to be replaced for
these subscribers. The Company does not expect to realize a loss on the sale of
these replacement hardware platforms. While there is no assurance, the Company
does not expect that the termination of AT&T Wireless Cellular Digital Packet
Data network will have a material adverse impact on its financial results. In its Report on Form 10-K filed with the Securities and Exchange
Commission on March 27, 2003, Verizon Wireless disclosed that it expects to
cease operating its Cellular Digital Packet Data network at the end of 2005.
The Company estimates that as of December 31, 2005 it will have approximately
5,000 subscribers in their initial contract periods that are then using Verizon
Wireless Cellular Digital Packet Data network and that would need to use an
alternate wireless protocol to continue to use its services. To use an
alternate wireless protocol, existing hardware platforms would have to be
replaced for these subscribers. The Company does not expect to realize a loss
on the sale of these replacement hardware platforms. While there is no
assurance, the Company does not expect that the termination of Verizon
Wireless Cellular Digital Packet Data network will have a material adverse
impact on our financial results. The Company is party to legal proceedings in the ordinary course of
business. Based on evaluation of these other matters, the Company believes that
these matters will not have a material effect on its results of operations or
financial position. Other Contingencies The Company from time to time enters into certain types of agreements that
contingently require it to indemnify parties against third party claims. These
agreements primarily relate to: (i) certain agreements with the Companys
officers, directors and employees and third parties, under which the Company
may be required to indemnify such persons for liabilities arising out of their
duties to the Company and (ii) certain agreements under which the Company
indemnifies customers and partners for claims such as those arising from
intellectual property infringement, personal injury, or non-performance under
the agreement. Such indemnification provisions are accounted for in accordance
with SFAS No. 5. To date, the Company has not incurred any costs related to any
claims under such indemnification provisions. The terms of such obligations vary. Generally, a maximum obligation is not
explicitly stated. Because the obligated amounts of these types of agreements
often are not explicitly stated, the overall maximum amount of the obligations
cannot be reasonably estimated. Historically, the Company has not been
obligated to make significant payments for these obligations, and no
liabilities have been recorded for these obligations on the Companys balance
sheet as of June 30, 2004. 10




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##### Table of Contents



In general, the Company provides its customers a one year limited warranty
in connection with the sale of its products that the hardware furnished under
the agreement will be free from defects in materials and workmanship and will
substantially conform to the specifications for such hardware. The Companys
policy is to expense such costs as incurred. To date, the Company has incurred
minimal costs related to this limited warranty obligation. Lease Obligations On
June 9, 2004 the Company entered into a sublease with VA Software Corporation as subtenant. The
lease term commences February 1, 2005 and terminates May 16, 2010. Total sublease base rent payments
are estimated to be $5,213,490. Note 9 Subsequent Events On April 12, 2004, the Company entered into a Combination Agreement with
MDSI Mobile Data Solutions, Inc. providing for the acquisition of MDSI. On July
27, 2004, the Company and MDSI Mobile Data Solutions Inc. mutually agreed to
terminate the Combination Agreement. As a result, for the three
months ended June 30, 2004 the Company expensed approximately
$2.0 million of capitalized acquisition-related costs. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations. Except for the historical information contained herein, the matters
discussed in this Form 10-Q are forward-looking statements involving risks and
uncertainties that could cause actual results to differ materially from those
in such forward-looking statements. Potential risks and uncertainties include,
but are not limited to, general economic and political conditions, our
historical and future losses, operating results and profitability, limited
operating history, the infancy of the wireless data industry where there is no
established market for our products and services, our ability to adapt to rapid
technological change, competition and our dependence on wireless networks, network
infrastructure and positioning systems owned and controlled by others. Further
information regarding these and other risks is included in this Form 10-Q, in
our annual report on Form 10-K for the year ended December 31, 2003 (No.
000-31511), filed on March 12, 2004, and in our other filings with the SEC. You
should read the following description of our financial condition and results of
operations in conjunction with our financial statements and notes thereto
included in this Form 10-Q, in our Form 10-K for the year ended December 31,
2003 and in our other filings with the SEC. Overview We are a leading provider of mobile resource management (MRM) services,
a rapidly growing category of business productivity solutions that enable the
effective management of mobile resources. Our MRM services allow customers to
improve productivity by enabling the effective management of their mobile
workers and assets, and their goods and services. In addition, our services are
designed to allow customers to increase the utility of their mobile resources
and decrease costs of operations by facilitating business processes, such as
event confirmation, signature verification, forms processing, project
management and timekeeping while their workers are in the field. Our services
also provide location, reporting, dispatch, messaging, and other management
services and are designed to be easy to implement and use. Our customers can
manage their mobile workers in several ways, including by logging onto our
website, having their data emailed to them, receiving their data directly into
their existing software applications, using any wireline or wireless telephone
to access our speech-to-text voice portal or requesting information from our
data centers using application programming interfaces. From July 1996 through June 1998, our operations consisted primarily of
various start-up activities relating to our current business, including
development of Global Positioning System technologies, recruiting personnel and
raising capital. We did not recognize any revenues prior to June 1998, and our
expenses consisted of research and development, sales and marketing and general
and administrative expenses. In 1998, we expanded our strategy and redirected
our focus to provide location-relevant and time-sensitive information services
and solutions to companies managing mobile resources. In the second half of
1998, we introduced FleetASAP, now called GeoManager, a service that leverages
existing infrastructure, including the Global Positioning System, wireless
networks and the Internet along with integrated transaction processing and
software applications, to enable companies to efficiently manage their mobile
resources. Subsequent to the introduction of FleetASAP, we have introduced a
number of additional services, including GeoManager Pocket Edition, @Road
Pathway, RoadREPORT, RoadFORCE and ConnectBusiness, and have added features to
our services. 11




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##### Table of Contents



Our services provide current and historical data relating to a customers
mobile resources in a variety of formats, including activity reports, maps and
completed business forms. We provide these formats in a standard configuration,
and customers can configure certain elements and views themselves to help
achieve compliance with their internal business rules. Customers can choose to
submit queries to our database to create reports and views on demand or they
can have reports delivered on a pre-scheduled basis. Customers can also
download reports to manipulate and store data as desired. Mobile resource data
is typically stored by us for 14 days, unless the customer purchases our
extended data storage services. Our services are enabled by the deployment of a device, which we call a
platform, to each of the customers mobile resources. We call each mobile
resource with a platform a subscriber. Our services operate with three
independent platforms. First, a mobile worker can use our proprietary hardware
device embedded with software that integrates a GPS receiver with a wireless
modem. Second, a mobile worker can use our proprietary hardware device embedded
with software and an integrated GPS receiver and which is tethered by cable to
a wireless telephone. Each of these proprietary hardware devices is called an
Internet Location Manager. The Internet Location Manager is installed in a
mobile workers vehicle. Installation in any type of vehicle typically takes
less than an hour, and is completed by our subcontracted installation agents.
Third, a mobile worker can use a location- or wireless application
protocol-enabled mobile telephone installed with our software application. These platforms send and receive a variety of information from time to
time and on demand. Such data include location, velocity, time and operational
diagnostics. These data are transmitted to our data centers using wireless
networks and the Internet. If a wireless connection is not available, then the
platform will store up to five days of captured data and seek to transmit the
data when a wireless connection is available. Since 1998, we have derived substantially all of our revenues from the
sale of our services and the associated product hardware. Our service revenue
is comprised of monthly fees. Our customers can contract to receive our
services for terms of one, two or three years and can purchase enhanced service
features for additional fees. As more customers use our services, the impact on
our service revenue is compounded. Our product revenue consists of sales of the
Internet Location Manager, Internet Data Terminal and ruggedized personal
digital assistant. To date, we have not sold our services outside the United States and
Canada; however, we intend to expand our service offerings to additional
countries in the future. We do not expect that revenues from international
sales will be material in 2004. Verizon Communications represented 18% of total
revenues for the six months ended June 30, 2004 and 15% for the same period
in 2003. No other customer comprised 10% or more of total revenues in either
period. Since inception we have invested substantially in research and
development, marketing, the building of our sales channels and our overall
infrastructure. We anticipate that such investments may increase in the future.
We incurred losses in each quarter from inception through the quarter ending
June 30, 2003, and may incur net losses in the future. At June 30, 2004, we had
an accumulated deficit of $112.0 million. Our limited operating history makes
it difficult to forecast future operating results. We may not sustain or
increase profitability on a quarterly or annual basis. In the third quarter of 2002, AT&T Wireless announced that it expects to
cease operating its Cellular Digital Packet Data network by June 30, 2004. On
March 11, 2004, we received a letter dated March 9, 2004 from AT&T Wireless
that states that AT&T Wireless will continue to operate its Cellular Digital
Packet Data network for certain valuable partners, including @Road, until at
least September 30, 2004. The letter further states that this extension of
Cellular Digital Packet Data network availability extends across all AT&T
Wireless geographic locations. We later received notification dated
May 28, 2004 that further extended availability of its Cellular
Digital Packet Data network to June 30, 2005. We are currently in discussions with AT&T
Wireless and other wireless carriers to minimize any disruption of the
provision of our services to subscribers. On or about the actual termination
date of AT&T Wireless Cellular Digital Packet Data network and where possible,
certain affected subscribers would be transferred to alternate Cellular Digital
Packet Data networks without a change to the hardware platform then used by
those subscribers. We currently estimate that as of
June 30, 2005 we will have approximately 2,500 subscribers in their initial contract periods
that are then using AT&T Wireless Cellular Digital Packet Data network that would need to use an alternate wireless protocol to continue to use our
services. To use an alternate wireless protocol, existing hardware platforms
would have to be replaced for these subscribers. We do not expect to realize a
loss on the sale of these replacement hardware platforms. While there is no
assurance, we do not expect that the termination of AT&T Wireless Cellular
Digital Packet Data network will have a material adverse impact on our
financial results. 12




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##### Table of Contents



In its Report on Form 10-K filed with the SEC on March 27, 2003, Verizon
Wireless disclosed that it expects to cease operating its Cellular Digital
Packet Data network at the end of 2005. We estimate that as of December 31,
2005 we will have approximately 5,000 subscribers in their initial contract
periods that are then using Verizon Wireless Cellular Digital Packet Data
network that would need to use an alternate wireless protocol to continue
to use our services. To use an alternate wireless protocol, existing hardware
platforms would have to be replaced for these subscribers. We do not expect to
realize a loss on the sale of these replacement hardware platforms. While there
is no assurance, we do not expect that the termination of Verizon Wireless
Cellular Digital Packet Data network will have a material adverse impact on our
financial results. Critical accounting policies Financial Reporting Release No. 60, which was released by the SEC in
January 2002, requires all companies to include a discussion of critical
accounting policies or methods used in the preparation of financial statements.
Included in Note 1 of the Notes to the Consolidated Financial Statements for the year
ended December 31, 2003 filed on Form 10-K, is a summary of the significant accounting policies
and methods we use. The following is a discussion of the more significant of
these policies and methods. Revenue recognition In accordance with applicable accounting standards, including SOP No.
97-2, Software Revenue Recognition, as amended, we recognize revenue when
earned. Specifically, we recognize revenue when the price is fixed and
determinable, upon persuasive evidence of an agreement, when we have fulfilled
our obligations under any such agreement and upon a determination that
collection is probable. Through June 30, 2004, our services have been available only by using our
platform or a location- or wireless application protocol-enabled mobile
telephone. Accordingly, through June 30, 2004, service revenue, which is
comprised of monthly fees, was recognized ratably over the minimum service
contract period, which commenced (a) upon installation where customers have
installed our platform in mobile worker vehicles or (b) upon the creation of
subscription licenses and a customer account on our website where customers
have elected to use our services with a location-enabled mobile telephone. Our product revenue primarily consists of sales of the Internet Location
Manager, Internet Data Terminal and ruggedized personal digital assistant. We
defer product revenue at installation and recognize it ratably over the minimum
service contract period, which generally is two or three years. Renewal rates
for our services are not considered priced at a bargain in comparison to the
initial sales price of an associated product (as described in Staff Accounting
Bulletin No. 104, Revenue Recognition). Changes to the pricing of our products
and services in the future could result in the recognition of product revenue
over periods that extend beyond the minimum service contract period. Historically, the selling prices of our products have often been at or
below our costs. Product costs not in excess of related product revenue are
deferred at the time of shipment and amortized ratably over the minimum service
contract period. Where the selling prices of our products are below our costs,
we expense the difference at the time of shipment of the related products. Allowances for doubtful accounts Historically, we have had a significant number of small- to medium-sized
companies utilizing our services. These customers are involved in diverse
businesses. Our payment arrangements with customers generally provide 30-day
payment terms. At the time that customers contract with us for our services, we
assess their creditworthiness. During economic downturns, certain of our customers have had difficulty
with their cash flows. The nature of our relationship with customers is
inherently long-term and we have extended and may extend payment terms on an
exception basis. We regularly review our customers ability to satisfy their
payment obligations and provide an allowance for doubtful accounts for all
specific receivables that we believe are not collectible. When these conditions
arise, we suspend recognition of revenue until collection becomes probable or
cash is collected. Beyond these specific customer accounts, we record an
allowance based on the size and age of all receivable balances against which we
have not established a specific allowance. These allowances are based on our
experience in collecting such accounts. 13




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##### Table of Contents



Although we believe that we can make reliable estimates for doubtful
accounts, the size and diversity of our customer base, as well as overall
economic conditions, may affect our ability to accurately estimate revenue and
bad debt expense. Actual results may differ from those estimates. Income taxes We have substantial deferred tax assets that relate to prior period
losses, primarily in the United States. We evaluate these deferred tax assets
in each tax jurisdiction by estimating the likelihood of generating future
profits to realize these assets. In most cases, we have assumed that we will
not be able to generate sufficient future taxable income to realize these
assets and have recorded valuation reserves to reduce the net asset values to
zero. If these estimates and assumptions change in the future, we may be
required to record additional valuation allowances against the net deferred tax
assets resulting in additional income tax expense in our consolidated statement
of operations. Conversely, we may be able to reverse the valuation allowances
in future periods should we generate taxable income and our assumptions regarding the generation
of future taxable income change. At December 31, 2003, we
had approximately $43.6 million of valuation allowances related to our net
deferred tax assets. RESULTS OF OPERATIONS The
three and six months ended June 30, 2004 and 2003. Three Months Ended
    
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Service revenue
    
    $
    14,385
    
    
    $
    12,135
    
    
    $
    28,412
    
    
    $
    22,738Cost of service revenue (excluding intangibles amortization included below)
    
    
    4,278
    
    
    
    4,266
    
    
    
    8,241
    
    
    
    8,058Intangibles amortization
    
    
    11
    
    
    
10
    
    
    
    21
    
    
    
    434Stock compensation  cost of service revenue
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    7Total cost of service revenue
    
    
    4,289
    
    
    
    4,278
    
    
    
    8,262
    
    
    
    8,499Service gross margin
    
    $
    10,096
    
    
    $
    7,857
    
    
    $
    20,150
    
    
    $
    14,239Service gross margin percentage
    
    
    70
    %
    
    
    65
    %
    
    
    71
    %
    
    
    63
    %
 Service revenue Service
revenue increased 19% and 25% for the three and six months ended June 30, 2004
from the same period in 2003, as a direct result of the growth in our installed
base of subscribers to our services. Subscribers were approximately 130,000,
130,000, 125,000, 109,000, 99,000 and 90,000, at June 30, 2004, March 31, 2004, December
31, 2003, June 30, 2003, March 31, 2003 and December 31, 2002,
respectively. In addition to subscribers, our service revenue is affected by a number of factors,
including the rate at which service features or add-ons are adopted and pricing
associated with the size and term of customer contracts. Given the fixed nature
of our arrangements with our customers and ratable revenue recognition, the
impact on revenues of changes in current prices for products and services is
tempered. This is also because revenues from new pricing are layered on top of revenues from
existing subscribers. Price changes did not have a material impact on service
revenue between periods. Average monthly revenue per subscriber was
approximately $37.03 for the three months ended June 30, 2004, down from
$38.89 for the same period in 2003. Of the change, an increase of approximately
$0.17 was related to adoption of additional service capabilities and features
by subscribers. The remaining decrease of approximately $2.03 was the result of
price changes associated with the types of services and size and term of
contracts for new subscribers as those new revenues were layered on top of
revenues from existing customers. Average monthly revenue per subscriber was approximately $36.85 for
the six months ended June 30, 2004, down from $38.15 for the same period in
2003. Of the change, an increase of approximately $0.26 was related to adoption
of additional service capabilities and features by subscribers. The remaining
decrease of approximately $1.55 was the result of price changes associated with
the types of services and size and term of contracts for new subscribers as
those new revenues were layered on top of revenues from existing customers. Underlying this change is a trend over recent quarters related to the
variety of wireless protocols we now offer customers, specifically, iDEN, GPRS,
and 1xRTT. We describe those arrangements in which customers contract directly
with carriers for the wireless airtime component of our service as unbundled.
Conversely, we describe arrangements in which we contract for the wireless
airtime portion as bundled. The nature of our relationship with the carriers
dictates whether we will be entering into a bundled or unbundled arrangement
with the customer. Selection of the appropriate protocol is related primarily
to optimal wireless coverage for a specific customer area of operation.
Additionally, we are indifferent as to what protocol is selected in that we have
priced our services such that a similar contribution to gross profits results
from either arrangement. We have observed an increase in the proportion of new
subscribers being added on an unbundled basis. We expect that this trend will
continue through the next 12 to 18 months. 14




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Cost of service revenue (excluding intangibles amortization) Cost of service revenue consists of expenses related to the delivery and
support of our services. Direct expenses are composed of costs associated with
connecting our services to wireless networks and the Internet and royalty and
subscription fees paid to others. Support and other delivery costs include such
expenses as employee salaries and related expenses and depreciation of our data
centers. Cost of service revenue remained flat at $4.3 million
for the three months ended June 30, 2004 and 2003, respectively.
During the period in 2004, increases in employee-related costs of $317,000 were offset in part
by decreases of $308,000 in delivery expenses. Cost of service revenue headcount increased to 105 from 72 at June
30, 2004 and 2003, respectively. Cost of service revenue increased to
$8.2 million from $8.1 million for the six months ended June 30,
2004 and 2003, respectively. The increase in cost of service revenue
resulted from an increase in employee-related costs of $612,000,
offset in part by a decrease in depreciation of $259,000, as certain
assets became fully depreciated and decreases of $251,000 in delivery
expenses. We expect that headcount increases during the
next 12 months will be moderate. Direct expenses generally increase at a rate
proportional to the growth in subscribers using our services. Personnel costs
and depreciation expense generally increase at a slower rate than the growth
rate of subscribers to our services. As a result, we expect that the growth in
service revenue will be greater than the growth in cost of service revenue as
we continue to add subscribers. Service gross margin During
the three and six months ended June 30, 2004 and 2003, service gross margins
improved to 70% from 65% and to 71% from 63%, respectively, as a result of increased service
revenue, associated with growth in our installed base of subscribers, and a
smaller increase in overall cost of service revenue, including intangibles
amortization and stock compensation. Average subscribers increased
25% and 28% for the three and six months ended June 30, 2004 compared to the same period in the prior year. Cost of service revenue
includes fixed indirect expenses and, therefore, generally increases at rates
slower than the growth in our installed base of subscribers. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Product revenue
    
    $
    3,946
    
    
    $
    3,634
    
    
    $
    7,811
    
    
    $
    6,772Cost of product revenue
    
    
    4,391
    
    
    
    5,192
    
    
    
    8,796
    
    
    
    9,829Stock compensation  cost of product
    revenue
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    14Total cost of product revenue
    
    
    4,391
    
    
    
    5,196
    
    
    
    8,796
    
    
    
    9,843Product gross deficit
    
    $
    (445
    )
    
    $
    (1,562
    )
    
    
    (985
    )
    
    
    (3,071
    )Product gross deficit percentage
    
    
    (11
    )%
    
    
    (43
    )%
    
    
    (13
    )%
    
    
    (45
    )% Product revenue Product
revenue increased 9% and 15% for the three and six months ended June 30, 2004,
respectively, from the same periods in 2003. This growth is consistent with the
growth in our installed base of subscribers whose service is enabled by
deployment of an Internet Location Manager. As new subscribers are added to our
installed base, the amount of both deferred revenue and deferred costs
recognized ratably over the minimum service contract period increases as well.
This effect is tempered by the number of subscribers whose service is deployed
through the use of a location-enabled or wireless application protocol-enabled mobile
telephone installed with our software application; we do not sell these devices
and therefore do not recognize any revenues or costs for such sales. Upon
completion of the initial term of a customers contract, recognition of both
deferred product revenue and product cost is complete. Customers may then renew
their agreements for future services without the purchase of new hardware and,
therefore, we anticipate that product revenue will grow more slowly than
service revenue. 15




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Cost of product revenue Cost of product revenue consists of the cost of the Internet Location
Manager, Internet Data Terminal, ruggedized personal digital assistant and
related parts; costs associated with the final assembly, test, provisioning,
delivery and installation of our products; and other costs such as provisions
for inventory and repair costs. Historically, the selling prices of our
products were often at or below our costs. Product costs not in excess of
related product revenue are deferred at the time of shipment and amortized
ratably over the minimum service contract period. Where the selling prices of
our products are below our costs, we expense the difference at the time of
shipment of the related products. Generally, we expect the selling prices of
our products to be approximately equal to or exceed the product costs in future
periods. The impact of selling products below our cost on future cash flow from
operations is expected to be minimal. As new subscribers are added to our
installed base, the amount of both deferred revenue and deferred costs
recognized ratably increases. Upon completion of the initial term of a
customers contract, recognition of deferred product cost is complete.
Customers may then renew their agreements for future services without the
purchase of new hardware and, therefore, we anticipate that product revenue and
cost of product revenue will grow more slowly than service revenue. Cost
of product revenue decreased to $4.4 million for the three months
ended June 30, 2004 from $5.2 million for the same period
in 2003. The decrease in cost of product revenue was the result of
certain non-recurring other costs of approximately $687,000 in the
three months ended June 30, 2003, including inventory provisions
and repair charges. Cost of product revenue decreased to
$8.8 million from $9.8 million for the six months ended
June 30, 2004 and 2003, respectively. The decrease in cost of
product revenue was the result of certain non-recurring other costs
of approximately $887,000 in the three months ended June 30,
2003, including inventory provisions and repair charges, as well as a
$207,000 reduction in lower-of-cost-or-market adjustments associated
with discounting of hardware. Product gross deficit During
the three and six months ended June 30, 2004 and 2003, product gross
deficit improved to (11)% from (43)% and to (13)% from (45)%, respectively. Increases in product
revenue from deferrals associated with the growth in our installed base of
subscribers were greater than the related increases in product costs from
deferrals. While we expect the selling prices of our products to be
approximately equal to or to exceed product costs in future periods, after
considering other costs, such as those described in Cost of product revenue
above, we do not expect to generate significant product gross margin during the
next twelve months. Intangibles amortization Intangibles amortization relates to the intangible assets purchased from
Differential Corrections, Inc. in April 2000 and ConnectBusiness.com in
September 2002. The costs are being amortized over estimated
useful lives of three and two years, respectively. We expect to have fully amortized these costs in 2004. Sales and marketing expenses Sales and marketing expenses consist of employee salaries, sales
commissions, and marketing and promotional expenses. Sales and
marketing expenses increased to $3.1 million from
$2.8 million for the three months ended June 30, 2004 and
2003, respectively. The change was the result of increases in
employee compensation of $279,000, associated with an increase in the
average headcount, and travel expenses of $110,000, offset in part by
decreases in sales commissions of $157,000. The decrease in sales
commissions resulted from a reduction in the rate at which net
subscribers were added to our installed base. Sales and marketing
headcount increased to 95 at June 30, 2004 from 86 at
June 30, 2003. Sales and marketing expenses increased to
$6.2 million from $5.4 million for the six months ended
June 30, 2004 and 2003, respectively. The change was the result
of increases in employee compensation of $572,000 and travel expenses
of $180,000, offset in part by decreases in sales commissions of
$155,000. We expect that sales and
marketing expenses will increase as we expand our sales and marketing efforts,
including, but not limited to, modest headcount growth and promotional expenses
related to new product and service offerings. Research and development expenses Research and development expenses consist of employee salaries and
expenses related to development personnel and consultants, as well as expenses
associated with software and hardware development. Research and
development expenses increased to $1.4 million from
$1.3 million for the three months ended June 30, 2004 and
2003, respectively. The change was primarily the result of increases
in employee-related costs of $67,000, associated with an increase in the
average headcount, and external product development expenses of
$53,000. Research and development headcount increased to 54 at
June 30, 2004, from 49 at June 30, 2003. Research and
development expenses increased to $2.8 million from
$2.6 million for the six months ended June 30, 2004 and
2003, respectively, primarily attributable to increases in employee-related
costs of $206,000. We expect
that research and development expenses will increase in future periods as we
develop and introduce new products and services. 16




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General and administrative expenses General and administrative expenses consist of employee salaries and
related expenses for executive and administrative costs, accounting and
professional fees, recruiting costs and provisions for doubtful accounts.
General and administrative expenses remained flat at
$2.4 million for the three months ended June 30, 2004 and
2003, respectively. During the period in 2004, increased employee-related costs of $251,000,
associated with employee incentives, were offset by a reduction of
$277,000 to provisions for doubtful accounts. This reduction was the
result of improved collection activity and receivables management.
General and administrative expenses decreased to $4.6 million
for the six months ended June 30, 2004 from $4.7 million for
the same period in 2003. The decrease was primarily due to a decrease
in the provision for doubtful accounts of $394,000 combined with
various small decreases in other expenses related to our operation as
a public company, offset in part by increases in employee-related
expenses of $498,000. General and administrative headcount decreased
to 51 at June 30, 2004 from 52 at June 30, 2003. We expect that general and
administrative expenses will increase in future periods, including modest
increases in employee-related expenses and professional fees associated with
our operation as a public company. On
April 12, 2004, we entered into a Combination Agreement with MDSI
Mobile Data Solutions, Inc. providing for the acquisition of MDSI. On
July 27, 2004, the parties mutually agreed to terminate the
Combination Agreement. As a result, for the three months ended
June 30, 2004 we expensed approximately $2.0 million of
capitalized acquisition-related costs. Stock compensation expense Deferred stock compensation related to stock option grants to employees
and consultants was fully amortized at March 31, 2004. Deferred stock
compensation was amortized on an accelerated basis over the vesting period of
individual awards. Interest income, net Interest income is composed primarily of interest income on cash, cash
equivalents and short-term investments. Interest expense relates to the
short-term financing of insurance costs. Interest income net of interest
expense increased to $329,000 from $137,000 and to $583,000 from
$285,000 in the three and six months ended June 30,
2004 and 2003, respectively. The increases are the result of larger invested
balances during the 2004 periods. Other income, net During
the three and six month periods ended June 30, 2004 and 2003, other
expense consisted primarily of net foreign currency transaction gains
(losses) related
to our subsidiary in India. Income taxes Through 2002, we incurred net losses for federal and state tax purposes
and except for only minimum state income and franchise taxes have not
recognized any tax provision or benefit. Net income earned during the three
and six months ended June 30, 2004, was offset by the utilization of prior years net
operating losses; therefore no income tax expense was provided. A net loss was
recorded for the three and six months ended June 30, 2003 and, therefore, no tax
provision or benefit was recognized in that period. Net income (loss) Net
income increased to $1.1 million for the three months ended
June 30, 2004 from a net loss of $227,000 for the three months
ended June 30, 2003. Net income increased to $4.2 million
for the six months ended June 30, 2004 from a loss of
$1.5 million for the same period in 2003. Our operating costs
increased to $17.6 million from $16.1 million for the three
months ended June 30, 2004 and 2003, respectively, and increased
to $32.6 million from $31.3 million for the six months ended
June 30, 2004 and 2003, respectively. The impact of these
increases in expenses was accompanied by increases in revenues to
$18.3 million from $15.8 million for the three months ended
June 30, 2004 and 2003, respectively, and an increase in revenues to
$36.2 million from $29.5 million for the six months ended
June 30, 2004 and 2003, respectively. We believe period-to-period comparisons of our operating results are not
necessarily meaningful. You should not rely on them to predict our future
performance. The amount and timing of our operating expenses may fluctuate
significantly in the future as a result of a variety of factors. LIQUIDITY AND CAPITAL RESOURCES As
of June 30, 2004, we held $14.9 million of cash and cash equivalents
and $96.8 million of short-term investments. Working capital
totaled $114.7 million at June 30, 2004. We have a $100,000 revolving line of credit facility
against which there were no borrowings as of June 30, 2004. The line of credit
expires December 31, 2004. 17




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Net
cash provided by operating activities was $2.5 million and
$1.3 million for the six months ended June 30, 2004 and 2003,
respectively. This improvement in net cash provided by operating
activities was primarily attributed to an increase in net income but also increased due to lower accounts
receivable, offset in part by decreases in accounts payable and
prepaid expenses and other assets. Improvements in accounts receivable collections as
compared to increases in customer billings also contributed to increased
operating cash flows in the six months ended June 30, 2004 compared to the
same period in the prior year. At
June 30, 2004 approximately $767,000 of our gross accounts receivable
were over 90 days old. We believe we have adequately provided allowances as of
June 30, 2004 for any such amounts that may ultimately become uncollectible.
We defer product costs at time of shipment and expense any amounts in excess of
the related product revenue at that time. We record accounts receivable from
our customers and defer related product revenue upon installation. Both
deferred product cost and revenue are recognized ratably over the minimum
service contract period. Deferred product costs are recorded at the time of
shipment and deferred product revenue is recorded at the time of installation.
As a result, deferred product costs will generally exceed deferred revenue as
we continue to grow our business. At June 30, 2004, total deferred product
costs of $19.4 million exceeded total deferred revenue and
customer deposits by $3.1 million. Net
cash used in investing activities during the six months ended
June 30, 2004 was $94.0 million, the majority of which was used to purchase
short-term investments. The remaining cash used was attributed to purchases of
property and equipment of $704,000. Net
cash provided by financing activities decreased to $2.4 million
from $2.5 million for the six months ended June 30, 2004 and 2003, respectively, due
to decreases in payments on notes receivable issued to stockholders
of $493,000, partially offset by an increase in proceeds from sale of
common stock of $385,000. The following table represents our future
commitments under minimum annual lease payments and
non-cancellable purchase commitments as of December 31,
2003 (in thousands): Less than
    
    
    
    
    
    More thanTotal
    
    1 Year
    
    1-3 Years
    
    3-5 Years
    
    5 YearsNon-cancellable operating lease commitments
    
    $
    2,262
    
    
    $
    1,489
    
    
    $
    773
    
    
    $
    
    
    
    $
    Non-cancellable inventory purchase commitments
    
    
    2,968
    
    
    
    2,968
    
    
    
    
    
    
    
    
    
    
    
    $
    5,230
    
    
    $
    4,457
    
    
    $
    773
    
    
    $
    
    
    
    $
     Other long-term liabilities in our consolidated
balance sheet as of December 31, 2003 include a deferred
rent liability of $33,000. The payments related to this amount
are included in non-cancellable operating lease commitments
above. On
June 9, 2004 we entered into a sublease with VA Software Corporation as subtenant. The
lease term commences February 1, 2005 and terminates May 16, 2010. Total sublease base rent payments
are estimated to be approximately $5.2 million. We believe that our current cash and cash equivalents will be sufficient
to meet our anticipated cash needs for operating expenses, working capital and
capital expenditures for at least the next eighteen months. If cash generated from operations is insufficient to satisfy our liquidity
requirements, we may seek to sell additional equity or debt securities or to
obtain a larger credit facility. If additional funds are raised through the
issuance of debt securities, holders of these securities could have certain
rights, preferences and privileges senior to holders of our common stock, and
the terms of this debt could restrict our operations. The sale of additional
equity or convertible debt securities could result in additional dilution to
our existing stockholders, and we cannot be certain that additional financing
will be available in amounts or on terms acceptable to us, if at all. If we are
unable to obtain additional financing, we may be required to reduce the scope
of our operations, which could harm our business, financial condition and
operating results. RISK FACTORS In addition to the other information contained in this Report, the
following factors should be carefully considered in evaluating our business and
prospects. The risks and uncertainties described below are intended to be ones
that are specific to us or our industry and that we deem material, but they are
not the only ones that we face. If, pursuant to its
announcements, AT&T Wireless ceases to operate its Cellular
Digital Packet Data network in 2005, we may lose subscribers and our revenues
could decrease. Beginning March 31, 2003, AT&T Wireless discontinued new sales of Cellular
Digital Packet Data service. AT&T Wireless has also indicated that it expects
to cease operating its Cellular Digital Packet Data network by
June 30, 2005. The termination of AT&T Wireless
Cellular Digital Packet Data network could disrupt our
ability to deliver services to certain of our customers. If we are unable to
transition those customers to other networks, our revenues would decrease and
customer satisfaction would suffer. 18




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If, pursuant to its announcement, Verizon Wireless ceases to operate its
Cellular Digital Packet Data network by the end of 2005, we may lose
subscribers and our revenues could decrease. Verizon Wireless has indicated that it expects to cease operating its Cellular
Digital Packet Data network by the end of 2005. The termination of Verizon
Wireless Cellular Digital Packet Data network could disrupt our ability to deliver
services to certain of our customers. If we are unable to transition those
customers to other networks, our revenues would decrease and customer
satisfaction would suffer. We face competition from internal development teams of potential customers and
from existing and potential competitors and, if we fail to compete effectively,
our ability to acquire new customers could decrease, our revenues could decline
and our business could suffer. The market for mobile resource management services is competitive and is
expected to become even more competitive in the future. If we do not compete
effectively, competition could harm our business and limit our ability to
acquire new customers and grow revenues, which in turn could result in a loss
of our market share and decline in revenues. We believe that our service
offerings face competition from a number of business productivity solutions,
including:  
    
    solutions developed internally by our prospective customers
information technology staffs, particularly by large customer prospects;
    
    discrete means of communication with mobile workers, such as pagers,
two-way radios, handheld devices and cellular telephones;
    
    solutions targeted at specific vertical markets, such as a service
offered by Qualcomm that monitors assets in the long-haul transportation
sector; and
    
    solutions offered by smaller market entrants, many of which are
privately held and operate on a regional basis. In addition, we believe that our service offerings may face competition from
manufacturing companies that seek to enter the mobile resource management
market, such as Trimble Navigation. We may also face competition from our current and potential partners, such as
wireless carriers, that may develop their own solutions, develop solutions with
captive and other suppliers or support the marketing of solutions of other
competitors. We also face numerous challenges associated with overcoming the following
competitive factors:  
    
    Size and resources.Many of our current and potential competitors
have access to substantially greater financial, marketing, distribution,
engineering and manufacturing resources than we do, which may enable
them to react more effectively to new market opportunities and customer
requirements. Furthermore, these competitors may be able to adopt more
aggressive pricing policies and offer more attractive terms than we can.
    
    Name recognition.Many of our current and potential competitors have
greater name recognition and market presence than we do, which may allow
them to more effectively market and sell solutions to our current and
potential customers.
    
    Limits of service offerings.Although we offer a broad range of
mobile resource management solutions, a customer prospect may require
functionality that we do not offer, which may enable current and
potential competitors to exploit the areas in which we do not develop
service offerings.
    
    Customer relationships.Many of our current and potential competitors
have pre-existing relationships with our large customer prospects, which
may allow them to more effectively market and sell competitive mobile
resource management solutions. As we seek to serve larger customers, we face competition from businesses with
greater financial resources, and we may be unable to compete effectively with
these businesses. The existing market is competitive. Competition is particularly vigorous for
larger customers, which is a customer segment we have worked to serve. We
expect competition to increase further as companies develop new products and/or
modify their existing products to compete directly with ours. These competitors
may have better name recognition, better product lines, greater sales,
marketing and distribution capabilities, significantly greater financial
resources, and existing relationships with some of our potential customers. We
may not be able to effectively compete with these companies. Greater financial
resources and product development capabilities may 19




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allow our competitors to respond more quickly to new or emerging technologies
and changes in customer requirements that may render our products obsolete. In
addition, these companies may reduce costs to customers and seek to obtain our
customers through cost-cutting and other measures. To the extent these
companies compete effectively with us, our business could be adversely affected
by extended sales cycles or fewer sales. If wireless carriers on which we depend for services decide to abandon or do
not continue to expand their wireless networks, we may lose subscribers and our
revenues could decrease. Currently our services function on General Packet Radio Services networks, Code
Division Multiple Access 1xRTT networks, Integrated Digital Enhanced Networks
and Cellular Digital Packet Data networks. These protocols cover only portions
of the United States and Canada.
If wireless carriers abandon these protocols in favor of other types of
wireless technology, we may not be able to provide services to our customers.
In addition, if wireless carriers do not expand their coverage areas, we will
be unable to meet the needs of customers who may wish to use some of our
services outside the current coverage area. Our quarterly operating results are subject to fluctuations, and our stock
price may decline if we do not meet the expectations of investors and analysts. Our quarterly revenues and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter due to a number of factors,
many of which are outside our control. These factors include, but are not
limited to:  
    
    changes in the market for mobile resource management services;
    
    delays in market acceptance or implementation by customers of our services;
    
    changes in length of sales cycles of or demand by our customers for existing and additional services;
    
    changes in the productivity of our distribution channels;
    
    introduction of new services by us or our competitors;
    
    changes in our pricing policies or those of our competitors or suppliers;
    
    changes in our mix of sources of revenues;
    
    general economic and political conditions;
    
    wireless networks, positioning systems and Internet infrastructure owned and controlled by others; and
    
    any need to migrate to new wireless networks, which could cause our
products to be incompatible with new wireless networks or out of date. Our expense levels are based, in part, on our expectation of future revenues.
Additionally, a substantial portion of our expenses is relatively fixed. As a
result, any shortfall in revenues relative to our expectations could cause
significant changes in our operating results from quarter to quarter. We
believe period-to-period comparisons of our revenue levels and operating
results are not meaningful. You should not rely on our quarterly revenues and
operating results to predict our future performance. Our operating
results have been, and in some future quarter our
operating results may be below the expectations of public market analysts and
investors and, as a result, the price of our common stock may fall. If we cannot deliver the features and functionality our customers demand, we
will be unable to retain or attract new customers. Our success depends upon our ability to determine the features and
functionality our customers demand and to design and implement services that
meet their needs in an efficient manner. We cannot assure you that we can
successfully determine customer requirements or that our future services will
adequately satisfy customer demands. In addition, we may experience
difficulties that could delay or 20




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prevent the successful development, introduction or marketing of new services
and service enhancements. If we cannot effectively deploy, maintain and enhance
our services, our revenues may decrease, we may not be able to recover our
costs and our competitive position may be harmed. If our customers do not have access to sufficient capacity on reliable wireless
networks, we may be unable to deliver our services, we may lose subscribers,
and our revenues could decrease. Our ability to grow and achieve profitability depends on the ability of
wireless carriers to provide sufficient network capacity, reliability and
security to our customers. Even where wireless carriers provide coverage to
entire metropolitan areas, there are occasional lapses in coverage, for example
due to tunnels blocking the transmission of data to and from wireless modems
used with our services. These effects could make our services less reliable and
less useful, and customer satisfaction could suffer. If one or more of the agreements we have with wireless carriers is terminated
and as a result we are unable to offer services to our customers within a
carriers coverage area, we may be unable to deliver our services, we may lose
subscribers, and our revenues could decrease. Our existing agreements with wireless carriers may in some cases be terminated
immediately upon the occurrence of certain conditions or with prior written
notice. In connection with ceasing operation of their Cellular Digital Packet
Data networks, AT&T Wireless and/or Verizon Wireless may seek to terminate or
not to renew their contracts for Cellular Digital Packet Data service with us.
If one or more of our wireless carriers decides to terminate or not to renew
its contract with us, we may incur additional costs relating to obtaining
alternate coverage from another wireless carrier outside of its primary
coverage area, or we may be unable to replace the coverage at all, causing a
complete loss of services to our customers in that coverage area. We may establish alliances or acquire technologies or companies in the future,
which could result in the dilution of our stockholders and disruption of our
business, which could reduce our revenues or increase our costs. We are continually evaluating business alliances and external investments in
technologies related to our business. Acquisitions of companies, divisions of
companies, businesses or products and strategic alliances entail numerous
risks, any of which could materially harm our business in several ways,
including:  
    
    diversion of managements attention from our core business objectives
and other business concerns;
    
    failure to integrate efficiently businesses or technologies acquired
in the future with our pre-existing business or technologies;
    
    potential loss of key employees from either our pre-existing business or the acquired business;
    
    dilution of our existing stockholders as a result of issuing equity securities; and
    
    assumption of liabilities of the acquired company. Some or all of these problems may result from current or future alliances,
acquisitions or investments. Furthermore, we may not realize any value from
these alliances, acquisitions or investments. We have a history of losses, have only recently become profitable and may not
sustain or increase profitability in the future. We have only recently become profitable and may not sustain or increase
profitability in the future. As of June 30, 2004, we had an accumulated
deficit of approximately $112 million. To sustain profitability we will need to generate
significant revenues to offset our cost of revenues and our sales and
marketing, research and development and general and administrative expenses. We
may not achieve or sustain our revenue or profit goals and may incur losses in the future. To facilitate the sale of our services, we have sold
and may sell our hardware below our costs. As a result, we have experienced,
and may continue to experience, negative gross margins on the sale of our
hardware. Changes such as increases in our pricing for products and services or
the pricing of competing products and services may harm our ability to increase
sales of our products and services to new and existing customers. If we are not
able to expand our customer base and increase our revenue from new and existing
customers, we may be unprofitable. 21




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We depend on a limited number of third parties to manufacture and supply
critical components for our products and services. We rely on sole suppliers and manufacturers for a number of key components for
these products and do not have long-term agreements with any of these suppliers
or manufacturers. If these parties do not perform their obligations, or if they
cease to manufacture and supply components critical for our products and
services, we may be unable to find other suppliers or operate our business. We
cannot be sure that alternative sources for key components used in our
products, such as the Internet Location Manager and the Internet Data Terminal,
will be available when needed, or if available, that these components will be
available on commercially reasonable terms. Our sole suppliers and
manufacturers of key components include:  
    
    Motorola, our sole supplier of wireless modems operable on Integrated
Digital Enhanced Networks and of microcontrollers for our Internet
Location Manager, and
    
    Taiwan Semiconductor Manufacturing Company, our sole manufacturer of
our GPS digital receiver chips. Although we believe we have sufficient quantities of GPS digital receiver chips
to last the next twelve months, if our agreements with these or other suppliers
and manufacturers are terminated or expire, if we are unable to obtain
sufficient quantities of components critical for our products and services, if
the quality of these components is inadequate, or if the terms for supply of
these components become commercially unreasonable, our search for additional or
alternate suppliers and manufacturers could result in significant delays, added
expense and our inability to maintain or expand our subscriber base. Any of
these events could require us to take unforeseen actions or devote additional
resources to provide our products and services and could harm our ability to
compete effectively. A disruption of our services due to accidental or intentional security breaches
may harm our reputation, cause a loss of revenues and increase our expenses. Unauthorized access, computer viruses and other accidental or intentional
actions could disrupt our information systems or communications networks. We
expect to incur significant costs to protect against the threat of security
breaches and to alleviate 22




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problems caused by any breaches. Currently, the wireless transmission of our
customers proprietary information is not protected by encryption technology.
If a third party were to misappropriate our customers proprietary information,
we could be subject to claims, litigation or other potential liabilities that
could seriously harm our revenues and result in the loss of customers. System or network failures could reduce our sales, increase costs or result in
liability claims. Any disruption to our services, information systems or communications networks
or those of third parties could result in the inability of our customers to
receive our services for an indeterminate period of time. Our operations depend
upon our ability to maintain and protect our computer systems at our co-located
data centers in Ashburn, Virginia and Redwood City, California, which is on or
near earthquake fault zones. Our services may not function properly if our
systems fail, or if there is an interruption in the supply of power, or if
there is an earthquake, fire, flood or other natural disaster, or an act of war
or terrorism. Within each of our data centers, we have fully redundant systems;
however, in the event of a system or network failure, the process of shifting
access to customer data from one data center to the other would be performed
manually, and could result in a further disruption to our services. Any
disruption to our services could cause us to lose customers or revenue, or face
litigation, customer service or repair work that would involve substantial
costs and distract management from operating our business. We depend on Global Positioning System technology owned and controlled by
others. If we do not have continued access to GPS technology or satellites, we
will be unable to deliver our services and revenues will decrease. Our services rely on signals from Global Positioning System satellites built
and maintained by the U.S. Department of Defense. GPS satellites and their
ground support systems are subject to electronic and mechanical failures and
sabotage. If one or more satellites malfunction, there could be a substantial
delay before they are repaired or replaced, if at all, and our services may
cease to function and customer satisfaction would suffer. In addition, the U.S. government could decide not to continue to operate and
maintain GPS satellites over a long period of time or to charge for the use of
the Global Positioning System. Furthermore, because of ever-increasing
commercial applications of the Global Positioning System and international
political unrest, U.S. government agencies may become increasingly involved in
the administration or the regulation of the use of GPS signals in the future.
If factors such as the foregoing affect the Global Positioning System, for
example by affecting the availability, quality, accuracy or pricing of GPS
technology, our business will suffer. Defects or errors in our services could result in the cancellation or delays of
our services, which would damage our reputation and harm our financial
condition. We must develop our services quickly to keep pace with the rapidly changing MRM
market. Products and services that address this market are likely to contain
undetected errors or defects, especially when first introduced or when new
versions are introduced. Our services may not be free from errors or defects,
which could result in the cancellation or disruption of our services or
dissatisfaction of customers. This would damage our reputation and result in
lost revenues, diverted development resources, and increased service and
warranty costs. The reporting of inaccurate location-relevant information could cause the loss
of customers and expose us to legal liability. The accurate reporting of location-relevant information is critical to our
customers businesses. If we fail to accurately report location-relevant
information, we could lose customers, our reputation and ability to attract new
customers could be harmed, and we could be exposed to legal liability. We may
not have insurance adequate to cover losses we may incur as a result of these
inaccuracies. Our success and ability to compete depends upon our ability to secure and
protect patents, trademarks and other proprietary rights. Our success depends on our ability to protect our proprietary rights to the
technologies used to implement and operate our services in the United States
and in foreign countries. In the event that a third party breaches the
confidentiality provisions or other obligations in one or more of our
agreements or misappropriates or infringes on our intellectual property or the
intellectual property licensed to us by third parties, our business would be
seriously harmed. To protect our proprietary rights, we rely on a combination
of trade secrets, confidentiality and other contractual provisions and
agreements, and patent, copyright and trademark laws, which afford us only
limited protection. Third parties may independently discover or invent
competing technologies or reverse engineer our trade secrets, software or other
technology. Furthermore, laws in some foreign countries may not protect our
proprietary rights to the same extent as the laws of the United States.
Therefore, the measures we take to protect our proprietary rights may not be
adequate. 23




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Claims that we infringe third-party proprietary rights could result in
significant expenses or restrictions on our ability to provide our services. Third parties may claim that our current or future products or services
infringe their proprietary rights or assert other claims against us. As the
number of entrants into our market increases, the possibility of an
intellectual property or other claim against us grows. Any intellectual
property or other claim, with or without merit, would be time-consuming and
expensive to litigate or settle and could divert management attention from
focusing on our core business. As a result of such a dispute, we may have to
pay damages, incur substantial legal fees, develop costly non-infringing
technology, if possible, or enter into license agreements, which may not be
available on terms acceptable to us, if at all. Any of these results would
increase our expenses and could decrease the functionality of our services,
which would make our services less attractive to our current or potential
customers. We have agreed in some of our agreements, and may agree in the
future, to indemnify other parties for any expenses or liabilities resulting
from claimed infringements of the proprietary rights of third parties. From time to time, we are or may be subject to litigation that could result in
significant costs to us. From time to time, we are or may be subject to litigation in the ordinary
course of business relating to any number or type of claims, including claims
for damages related to errors and malfunctions of our services or hardware
platforms or their deployment. A securities, product liability or other claim
could seriously harm our business because of the costs of defending the
lawsuit, diversion of employees time and attention, and potential damage to
our reputation. Some of our agreements with our customers, suppliers and other
third parties contain provisions designed to limit exposure to potential
claims. Limitation of liability provisions contained in our agreements may not
be enforceable under the laws of some jurisdictions. As a result, we could be
required to pay substantial amounts of damages in settlement or upon the
determination of any of these types of claims. Although we carry general
liability and directors
and officers insurance, our insurance may not cover potential claims or may not
be adequate to cover all costs incurred in defense of potential claims or to
indemnify us for all liability that may be imposed. Our success depends on our ability to maintain and expand our sales channels. To increase our market awareness, customer base and revenues, we need to expand
our direct and indirect sales operations. There is strong competition for
qualified sales personnel, and we may not be able to attract and retain
sufficient new sales personnel to expand our operations. New sales personnel
require training and it takes time for them to achieve full productivity, if at
all. In addition, we believe that our success is dependent on expansion of our
indirect distribution channels, including our relationships with wireless
carriers, independent sales agents and distribution partners. To date, we have
relationships with wireless carriers, independent sales agents and a limited
number of distribution partners. These sales channel partners require training
in selling our products and services and it will take time for these partners
to achieve productivity, if at all. We may not be able to establish
relationships with additional distributors on a timely basis, or at all. Our
distributors, many of which are not engaged with us on an exclusive basis, may
not devote adequate resources to promoting and selling our services. We depend on recruiting and retaining qualified personnel and our inability to
do so may cause a loss in sales, impair our ability to effectively manage our
operations or impair our ability to develop and support services and products. Because of the technical nature of our services and the market in which we
compete, our success depends on the continued services of our current executive
officers and our ability to attract and retain qualified personnel with
expertise in wireless communications, Global Positioning Systems, hosted
software applications, transaction processing and the Internet. Competitors and
others have in the past, and may attempt in the future, to recruit our
employees. In addition, new employees generally require substantial training,
which requires significant resources and management attention. Even if we
invest significant resources to recruit, train and retain qualified personnel,
we may not be successful in our efforts. Government regulations and standards could subject us to increased regulation,
increase our costs of operations or reduce our opportunities to earn revenue. 24




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In addition to regulations applicable to businesses in general, we may also be
subject to direct regulation by U.S. governmental agencies, including the
Federal Communications Commission and Department of Defense. These regulations
may impose licensing requirements, privacy safeguards relating to certain
subscriber information, or safety standards, for example with respect to human
exposure to electromagnetic radiation and signal leakage. A number of
legislative and regulatory proposals under consideration by federal, state,
provincial, local and foreign governmental organizations may lead to laws or
regulations concerning various aspects of the Internet, wireless communications
and GPS technology, including on-line content, user privacy, taxation, access
charges and liability for third-party activities. Additionally, it is uncertain
how existing laws governing issues such as taxation on the use of wireless
networks, intellectual property, libel, user privacy and property ownership
will be applied to our services. The adoption of new laws or the application of
existing laws may expose us to significant liabilities and additional
operational requirements, which could decrease the demand for our services and
increase our cost of doing business. Wireless carriers who supply us with
airtime are subject to regulation by the Federal Communications Commission, and
regulations that affect them could also increase our costs or limit the
provision of our services. Fluctuations in the value of foreign currencies could result in increased
product costs and operating expenses. We have suppliers and manufacturers that are located outside the United States.
Some transactions relating to supply and development agreements may be
conducted in currencies other than the U.S. dollar, and fluctuations in the
value of foreign currencies relative to the U.S. dollar could cause us to incur
currency exchange costs. In addition, some of our transactions denominated in
U.S. dollars may be subject to currency exchange rate risk. We cannot predict
the effect of exchange rate fluctuations on our future operating results.
Should there be a sustained increase in average exchange rates for the local
currencies in these countries, our suppliers and manufacturers may request a
price increase at the end of the contract period. Geopolitical, economic and military conditions, including terrorist attacks and
other acts of war, may materially and adversely affect the markets on which our
common stock trades, the markets in which we operate, our operations and our
profitability. Terrorist attacks and other acts of war, and any response to them, may lead to
armed hostilities and such developments would likely cause instability in
financial markets. Armed hostilities and terrorism may directly impact our
facilities, personnel and operations which are located in the United States and
India, as well as those of our clients. Furthermore, severe terrorist attacks
or acts of war may result in temporary halts of commercial activity in the
affected regions, and may result in reduced demand for our products. These
developments could have a material adverse effect on our business and the
trading price of our common stock. Our stock price is volatile, which may cause you to lose money and could lead
to costly litigation against us that could divert our resources. Stock markets have recently experienced dramatic price and volume fluctuations,
particularly for shares of technology companies. These fluctuations can be
unrelated to the operating performance of these companies. Broad market
fluctuations may reduce the market price of our common stock and cause you to
lose some or all of your investment. These fluctuations may be exaggerated if
the trading volume of our common stock is low. In addition, due to the
technology-intensive nature and growth rate of our business and the mobile
resource management market, the market price of our common stock may rise and
fall in response to:  
    
    quarterly variations in operating results;
    
    failure to achieve operating results anticipated by securities analysts and investors;
    
    changes in estimates of our financial performance or changes in recommendations by securities analysts;
    
    announcements of technological or competitive developments;
    
    the gain or loss of a significant customer or order;
    
    disposition of shares of our common stock held by large investors; and
    
    acquisitions or strategic alliances by us or our competitors. 25




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When the market price of a companys stock drops significantly, stockholders
often institute securities class action lawsuits against that company. A
lawsuit against us could cause us to incur substantial costs and could divert
the time and attention of our management and other resources from our business. As of July 30, 2004,
a limited number of stockholders own approximately 31% of
our stock and may act, or prevent certain types of corporate actions, to the
detriment of other stockholders. Our directors, officers and
greater than 5% stockholders own, as of July 30,
2004, approximately 31% of our outstanding common stock. Accordingly, these
stockholders may, if they act together, exercise significant influence over all
matters requiring stockholder approval, including the election of a majority of
the directors and the determination of significant corporate actions. This
concentration could also have the effect of delaying or preventing a change in
control that could otherwise be beneficial to our stockholders. Our certificate of incorporation and bylaws and state law contain provisions
that could discourage a takeover. We have adopted a certificate of incorporation and bylaws, which in addition to
state law, may discourage, delay or prevent a merger or acquisition that a
stockholder may consider favorable. These provisions include the following:  
    
    establishing a classified board in which only a portion of the total board members will be elected at each annual meeting;
    
    authorizing the board to issue preferred stock;
    
    prohibiting cumulative voting in the election of directors;
    
    limiting the persons who may call special meetings of stockholders;
    
    prohibiting stockholder action by written consent; and
    
    establishing advance notice requirements for nominations for election
to the board of directors or for proposing matters that can be acted on
by stockholders at stockholder meetings. We have adopted a certificate of incorporation that permits our board to issue
shares of preferred stock without stockholder approval, which means that our
board could issue shares with special voting rights or other provisions that
could deter a takeover. In addition to delaying or preventing an acquisition,
the issuance of a substantial number of shares of preferred stock could
adversely affect the price of our common stock and dilute existing
stockholders. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk. Foreign Currency Exchange We transact business primarily in U.S. dollars. We are subject, however,
to adverse movements in foreign currency exchange rates in those countries
where we conduct business. To date, the effect of fluctuations in foreign
currency exchange rates on expenses has not been material. Operating expenses
incurred by our subsidiary in India are denominated in Indian rupees. This
subsidiary was formed in November 1999 and provides research and development
and customer service activities. We hold fixed-price agreements denominated in
U.S. dollars with key foreign-based suppliers: Orient Semiconductor
Electronics, in Taiwan, manufactures the Internet Location Manager; Sierra
Wireless, in Canada, provides the modem for some versions of the Internet
Location Manager; Taiwan Semiconductor Manufacturing Company, in Taiwan,
manufactures our Global Positioning System digital receiver chips; and
Micronet, in Israel, supplies our Internet Data Terminal. Should there be a
sustained increase in average exchange rates for the local currency in any of
the foregoing countries, our suppliers may request increased pricing on any new
agreements. If this were to occur for all of these currencies and with each of
these suppliers, a 10 percent increase in average exchange rates could increase
our product costs by approximately 4 percent. We do not use derivative financial instruments for speculative trading
purposes, nor do we currently hedge any foreign currency exposure to offset the
effects of changes in foreign exchange rates. Similarly, we do not use
financial instruments to hedge operating expenses of our subsidiary in India. 26




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Item 4. Controls and Procedures. Within 90 days prior to the date of this Report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, of
the effectiveness of our disclosure controls and procedures as defined in Rules
13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934 (the Exchange
Act). Based upon that evaluation, our principal executive officer and
principal financial officer have concluded that our disclosure controls and
procedures are effective. Our disclosure controls and procedures are designed
to provide a reasonable level of assurance of reaching our desired disclosure
control objectives and are effective in doing so. There were no significant changes in our internal controls or in other
factors that could significantly affect these internal controls subsequent to
the date of their evaluation. 
 PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings. From time to time, we are subject to claims in legal proceedings arising
in the normal course of our business. We do not believe that we are party to
any pending legal action that could reasonably be expected to have a material
adverse effect on our business, financial condition or operating results. 
 Item 4. Submission of Matters to a Vote of Security Holders. On June 18, 2004, we held our annual meeting of stockholders. The following
summarizes the matters submitted to a vote of the stockholders:  1.
    
    The election of the following nominees to serve as members of
our Board of Directors: Nominee
    
    Votes in Favor
    
    Votes AgainstKrish Panu
    
    
    49,883,010
    
    
    
    302,217T. Peter Thomas
    
    
    49,948,581
    
    
    
    236,646
  2.
    
    The ratification of the appointment of Deloitte & Touche LLP as
our independent auditors for the year ending December 31, 2004. Votes in Favor: 49,858,653
    
    Votes Against: 308,774
    
    Votes Abstaining: 17,800
  3.
    
    The approval to change our name from At Road, Inc. to @Road,
Inc.: Votes in Favor: 50,146,267
    
    Votes Against: 17,991
    
    Votes Abstaining: 20,969
 The names of each director whose term of office as a director continued after
the annual meeting of stockholders are the following: Krish Panu
Kris Chellam
Charles Levine
Stuart Phillips
T. Peter Thomas 27




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Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits  10.42
    
    Sublease between the Registrant and VA Software Corporation, dated June 8, 2004.10.43
    
    Consent to Sublease Agreement between the Registrant, VA Software Corporation and Renco Investment
Company, dated June 9, 2004.31.1
    
    Rule 13a-14(a)/15d-14(a) Certification31.2
    
    Rule 13a-14(a)/15d-14(a) Certification32.1
    
    Section 1350 Certification32.2
    
    Section 1350 Certification (b) The Company filed the following reports on Form 8-K during the three
months ended June 30, 2004:  
    
    A current report on Form 8-K was filed on April 8, 2004 pursuant
to Item 7 (Financial Statements, Pro FormaFinancial Information and
Exhibits) and Item 9 (Regulation FD Disclosure).
    
    A current report on Form 8-K was filed on April 13, 2004 pursuant
to Item 5 (Other Events) and Item 9 (Regulation FD Disclosure).
    
    A current report on Form 8-K was filed on April 13, 2004 pursuant
to Item 7 (Financial Statements, Pro FormaFinancial Information and
Exhibits) and Item 9 (Regulation FD Disclosure).
    
    A current report on Form 8-K was filed on April 22, 2004 pursuant
to Item 7 (Financial Statements, Pro FormaFinancial Information and
Exhibits) and Item 12 (Results of Operations and Financial Condition).
    
    A current report on Form 8-K was filed on April 30, 2004 pursuant
to Item 7 (Financial Statements, Pro FormaFinancial Information and
Exhibits) and Item 9 (Regulation FD Disclosure).
    
    A current report on Form 8-K was filed on May 25, 2005 pursuant
to Item 9 (Regulation FD Disclosure).
    
    A current report on Form 8-K was filed on June 17, 2004 pursuant
to Item 7 (Financial Statements, Pro FormaFinancial Information and
Exhibits) and Item 9 (Regulation FD Disclosure).
    
    A current report on Form 8-K was filed on June 28, 2004 pursuant to
Item 7 (Financial Statements, Pro FormaFinancial Information and
Exhibits) and Item 9 (Regulation FD Disclosure). 28




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. @ROAD, INC. By: /s/ Michael Johnson Michael Johnson
Chief Financial Officer
(Principal Financial and Accounting
Officer) Date:
August 9, 2004 29




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Exhibit Index Exhibits  10.42
    
    Sublease between the Registrant and VA Software Corporation, dated June 9, 2004.10.43
    
    Consent to Sublease Agreement between the Registrant, VA Software Corporation and Renco Investment Company, dated June 9, 2004.31.1
    
    Rule 13a-14(a)/15d-14(a) Certification.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification.32.1
    
    Section 1350 Certification.32.2
    
    Section 1350 Certification. 30